# Capital Budgeting Techniques for Comparing Investment Criteria

Consider the following two mutually exclusive projects: whichever project you choose you require a 15% return on your investment. Round answers (a-d) to two decimal places and (e) to three decimal places.

Year Cash Flow (A) Cash Flow (B)

0 -$294,055 -$32,324

1 17,844 13,773

2 29,642 9,531

3 32,787 10,151

4 394,310 12,887

a. The payback period for Projects A and B is_____ and____years. If you apply the payback criterion, which project will you choose? Project A or B ? Round answer to 2 decimal places.

b. The discounted payback period for Projects A and B is____and____years, If you apply the discounted payback criterion, which project will you choose Project A or B ? Round answer to 2 decimal places.

c. The NPV for Projects A and B is $____and $____, If you apply the NPV criterion, which project will you choose Project A or B? Round answer to 2 decimal places.

d. The IRR for Projects A and B is____percent and____percent If you apply the IRR criterion, which project will you choose A or B? Round answer to 2 decimal places.

e. The profitability index for Projects A and B is____and____, respectively. If you apply the profitability index criterion, which project will you choose A or B? Round answer to 3 decimal places.

f. Based on your answers in (a) through (e), you finally choose Project

A or B_______? , Why______?

A. a. 3+(213,782 / 394,310)= 3.54216733 = 3.54 yrs

b. 2+(9,020 /10,151)=2.888582406= 2.88 yrs

*(numbers 2,3,4 are exponents in each problem -- Is there a way for me to write the numbers as exponents for this program?)

B. a. 17,844/1.15 + 29,642/1.15 2 + 32,787/ 1.15 3= 59488.11704

394,310 / 1.15 4= 225448.0223

3+(294,055 - 59488.11704/225448.0223)=

3+( 294054.7361)= 294057.7361 =3.61yrs

b. 13,773/ 1.15 + 9,531/1.15 2 = 19183.32703

10,151/ 1.15 3= 6674.447275

19183.32703 / 6674.447275= 2.874144665 = 2.87yrs

C. NPV=

a. -294,055 + 17,844/ 1.15 + 29,642/ 1.15 2 +32,787/1.15 3 + 394,310/ 1.15 4= -24619.8659 or is it 563490.1341 ?

b. -32,324 + 13,773/1.15 + 9,773/1.15 2 + 10,151/1.15 3 + 12,887/1.15 4= 1084.94515

D. IRR

Can you please help me with the IRR which should bring the NPV back to 0, I think it can be done using a spreadsheet.

E. PI

a. 269435.1341 / 294,055 = .916274622

b. 33408.94515/ 32,324 = 1.033564693

F. Which project should i choose and why?

i have the same problem yet with these numbers.

Year Cash Flow (A) Cash Flow (B)

0 -$168,156 -$27,484

1 15,885 12,243

2 32,152 12,669

3 32,860 10,751

4 342,460 9,531

#### Solution Preview

Payback period

TABLE-I

CASH FLOWS MACHINE A Cumulative cash flow MACHINE B Cumulative cash flow

YEAR 0 -294055 -294055 -32324 -32324

YEAR 1 17844 -276211 13773 -18551

YEAR 2 29642 -246569 9531 -9020

YEAR 3 32787 -213782 10151 1131

YEAR 4 394310 180528 12887 14018

A. a. 3+(213,782 / 394,310)= 3.54216733 = 3.54 yrs

b. 2+(9,020 /10,151)=2.888582406= 2.88 yrs

Your calculations are correct

Recommendations: Project B will be choosen as it has less payback period. It means that it will recoup its cash oulay ...

#### Solution Summary

This explains the evaluation of the project through various capital budgeting techniques by using various examples.